Tax rules threaten emergence of Indian REITs

Lobbyists for Asia’s real estate industry have urged Indian authorities to level the taxation playing field between REITs and other investment vehicles following the announcement of new Prime Minister Narendra Modi’s maiden budget.

The Asia Pacific Real Estate Association (APREA) welcomed plans to finally introduce REITs to the Indian market, but voiced concerns over the government’s proposed tax structure for REITs, which it said could result in multiple levels of tax for domestic investors.

“APREA has suggested a single-level tax in line with international practices, which would also ensure that government revenue is not diluted. Indeed, it is more likely to increase levels of economic activity, which can lift overall tax revenues,” said APREA’s Chief Executive Officer Peter Verwer.

He claimed that the proposed treatment of dividend distribution tax (DDT) at special purpose vehicle (SPV) level and capital gains tax (CGT) on sale of units of REITs by sponsors would dampen enthusiasm for these investment products. “By aligning the DDT and CGT relief between REITs and other business entities, the government will more effectively foster a new investment asset class,” Mr. Verwer said.

APREA said that infrastructure investment trusts (InvITs) and REITs – both mentioned in Mr. Modi’s budget – will provide retail and institutional investors with a regulated platform to invest in income-generating real assets, increase foreign capital inflows into India, and boost capital investment.

India first floated the possibility of REITs in 2008, but the proposal was shelved as a result of the global financial crisis.

Mr. Modi is seeking a faster pace of growth for the Indian economy and his government’s budget included plans to increase spending on infrastructure, as well as allowing greater FDI in insurance and defence. The budget also promised tax incentives for savings and investments.

Indian Finance Minister Arun Jaitley has vowed to accelerate GDP growth to between 7% and 8% annually within the next three to four years.

Despite planned new spending, Mr. Jaitley adhered to the budget deficit target of 4.1% of GDP this fiscal year; a level set by the previous Indian National Congress administration, before narrowing it down to 3% of GDP by 2016-2017.

Without significant tax hikes or a broadening of the tax base, the fiscal deficit target will be hard to achieve, say economists. HSBC Global Research expects that the budget deficit will deepen to around 4.5% of GDP for the current fiscal year. However, it adds that this is “hardly a devastating outcome, but also not quite the belt-tightening seemingly delivered today”.

Ratings agency Moody’s Investors Service said that a smaller fiscal deficit would be credit positive, but that the budget did not address specific revenue and expenditure measures that could shrink this deficit. Moody’s also said that the government was not specific in outlining changes to the current subsidy regime.

Despite the presence of stimulus measures, Moody’s said that their effects on overall GDP growth will be muted, unless there is a decline in inflation, interest rates and regulatory constraints on private investment.